On October 21, 2015, the IRS released the annual inflation adjustments which will apply to tax year 2016. These adjustments will help determine a taxpayer's tax bracket and available deductions, credits, exclusions, and exemptions.

Estate, Gift and Generation-Skipping Transfer Tax

1. Exemption Amount. The estate, gift and GST tax exemptions increase by $20,000 to $5,450,000 per person.
2. Annual Exclusion for Gifts. The nontaxable annual exclusion amount for gift tax purposes remains at $14,000 per person. Nontaxable gifts to spouses are generally unlimited; however, if the spouse receiving the gift is not a United States citizen, nontaxable gifts for gift tax purposes are limited to an aggregate of $148,000 per year.

Income Taxation

1. Ordinary Income. Taxpayers in the highest income tax bracket of 39.6 percent this year will be those with taxable income over $415,050 for an individual, $466,950 for married joint filers, $441,000 for heads of household, and $233,475 for married filers filing separately.
2. Standard Deduction. The standard deduction remains the same, at $6,300, $6,300, and $12,600, for individuals, married filers filing separately, and married filers filing jointly, respectively. The standard deduction increases to $9,300 for heads of household.
3. Personal Exemption. The personal exemption increases by $50 to $4,050. The exemption will begin to phase out for taxpayers whose adjusted gross income is over $259,400 for an individual, $311,300 for married joint filers, $285,350 for heads of household, and $155,650 for married filers filing separately. If subject to this phase out, a taxpayer's exemptions will be reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the amount above and thus will phase out completely at $381,900 for an individual, $433,800 for married joint filers, $407,850 for heads of household, and $216,900 for married filers filing separately.
4. Limitation on Itemized Deductions ("Pease" limitation). For taxpayers whose adjusted gross income is over $259,400 for an individual, $311,300 for married joint filers, $285,350 for heads of household, and $155,650 for married filers filing separately, itemized deductions will be reduced by 3 percent of the amount by which the taxpayer's adjusted gross income exceeds the applicable threshold stated above, but the deductions may not be reduced by more than 80 percent. Certain deductions, such as medical expenses, are not reduced.

Health Provisions

1. Flexible Spending Arrangements (FSA). The limit on contributions to an FSA remains at $2,550.
2. Health Savings Accounts (HSA). Individuals who are covered by a High Deductible Health Plan and are not covered under any other health plan may establish an HSA. The IRS released the inflation adjustments relating to HSAs in May, and the HSA definition of a "High Deductible Health Plan" is different from the definition discussed above relating to MSAs. For 2016, a High Deductible Health Plan is defined as a plan that offers self-only coverage with a deductible of not less than $1,300, and the out-of-pocket expenses do not exceed $6,550, and offers family coverage with a deductible of not less than $2,600, and the out-of-pocket expenses do not exceed $13,100. The HSA contribution limit for 2016 is $3,350 for individuals and $6,750 for families, and individuals 55 years of age and older can contribute an additional $1,000.